Monthly Archives: May 2011
Recent headlines all across America have told of floods, tornadoes and other natural disasters, all of which affect FHA borrowers, their homes and their mortgages.
When an area is declared a major disaster area by the President of the United States, FHA borrowers should know there are programs that can help them in the wake of the disaster, provide help and forbearance on FHA loans, and even temporarily stop foreclosure proceedings.
FHA officials urge borrowers to contact the FHA and the lender as soon as possible in the wake of a disaster as there are many steps that need to be taken in order to get help, advice and work on repairing a home damaged in the disaster area. But even before those calls are made, the FHA has begun taking steps of its own.
According to the FHA official site, “Once the President declares a major disaster, HUD immediately issues a 90-day moratorium on foreclosures and forbearance on foreclosures of FHA home mortgages.”
The 90-day moratorium is just that–a temporary measure designed to give relief to disaster victims. Borrowers are not excused from taking steps to save their homes if they were previously in danger of default or foreclosure, but the moratorium does provide some extra time to get things done.
FHA adds, “In addition, there are FHA mortgage programs that can be used by disaster victims who have lost their homes and are facing the daunting task of rebuilding or buying another home. For example, under FHA’s Section 203(h) program borrowers are eligible for 100% financing.” FHA(h) loans are available for those in Presidentially declared disaster areas for up to one year after the declaration.
In the midst of disaster recovery, FHA borrowers may be offered quick settlements by insurance companies. FHA experts caution borrowers not to be hasty with such settlements, especially if the borrower has not had time to have his or her home inspected after the damage occurred. Do you know how much it will actually cost to repair your property? An insurance company with a settlement check may seem like well-timed financial relief, but if you aren’t well-informed as to the actual costs, that settlement check may not be enough.
When trying to claim benefits in a disaster area, be sure to contact FEMA for information on benefits and requirements for applying. Some disaster relief programs need the recipient to be registered with FEMA before that relief can begin. Learn more at the FEMA site: http://www.fema.gov/assistance/index.shtm
In our last blog post we discussed FHA minimum property requirements. Any home a buyer wants to make a serious offer on with an FHA insured loan must live up to the FHA’s minimum property standards or the loan cannot be approved.
That doesn’t mean the home must be 100% in compliance when the appraiser comes to review the property, but it does mean that any deficiencies found must be corrected prior to the loan being closed upon.
The FHA has three basic principles that guide an FHA appraiser when examining the home–it must be safe, sound, and secure. There are specific requirements in each area. For example, a home must not have stairways that aren’t equipped with hand rails, there must be no exposed wiring in the home, and the roof must have two years of life left in it at a minimum.
A leaking roof must be repaired or replaced according to the FHA assigned appraiser’s recommendations, or the loan could not be approved.
Of what FHA appraisers sometimes call “The Three S’s”, safety, soundness, and security, it’s the final “S” that creates the most confusion among buyers. It’s easy to assume that “security” refers to a home that is safe from storms and from break-ins, but what “security” really stands for in this case is the security of the loan itself.
According to the FHA, “security refers to risk to
First-time applicants for an FHA mortgage learn soon learn about the FHA’s list of minimum property requirements, which any property bought with an FHA insured loan must live up to in order to get loan approval.
The FHA has three guiding principles that inform its list of minimum property requirements, defined by what some appraisers call “the three S’s” which include safety, soundness and security. An FHA appraiser will come to inspect the property a borrower wants to buy, looking at the home to make sure it meets the FHA standards in each of these three areas.
When it comes to safety, the FHA tells its appraisers, “Deficiencies or a lack of functioning components of plumbing, electrical or heating and cooling systems may create hazards that could be considered health and safety issues. Safety hazards can also be the result of issues having to do with the soundness of a property or simply a missing handrail or other hazards affecting the health and well-being of the occupants.”
The simple lack of a handrail or a related issue does not automatically disqualify a home from being purchased with an FHA guaranteed loan, but the FHA appraiser will note such deficiencies and require them to be corrected prior to the loan being closed upon. FHA borrowers don’t have to live in fear of the safety component of the appraisal, in many cases it’s a matter of simple corrections, improvements or additions to the property.
It’s a different matter when a property doesn’t live up to the “soundness” category. According to the FHA Appraiser Roster Newsletter, “Soundness relates to the structure and structural components of the dwelling. They include not only the foundation but also other elements such as floor, wall and roof framing systems. Decks, porches and patios may
also pose structural issues.”
Like the safety category, some structural issues may be fixed with a minimum of expense by the owner, but some problems are more serious. A roof, for example, must have at least two years of life left in it according to the FHA official site. A roof with less than two functional years may need to be repaired or completely replaced. The FHA appraiser will note any problem he or she spots and make recommendations accordingly–when it comes to problems noticed with the roof, the appraiser must recommend either repair or replacement specifically.
According to the FHA, the “secure” category is the most confusing. We’ll cover that in detail in our next blog post.
There was a recent question in the comments section of this blog about FHA loan assumptions, so we thought it would be a good time to review the basics.
Assumption of an FHA loan is a process where, according to the FHA official site, “the responsibility of the mortgage is acquired by another person through either Simple or Creditworthiness process.” This means that a potential borrower could take over the FHA mortgage of another borrower, but in some cases the process varies depending on when the FHA insured loan was originated.
The “Simple” assumption process is only for FHA loans originated before December 1, 1986. Loans after that date may also be assumed, but the FHA requires a “creditworthiness assumption process”. Simple assumptions allow the borrower and lender to agree on the loan assumption without prior approval from the FHA.
For all loans after the 1986 cut off date, FHA approval and borrower credit verification are required. The “new” FHA rules governing loan assumption requires the borrower to qualify much in the same way he or she would qualify for any other FHA home loan.
FHA requirements state a loan assumption credit check should be the same as the procedure for any FHA loan application. Loan assumptions can’t offer more lenient credit check policies or more stringent ones.
Under the “Determining if an Assumptor is Creditworthy” rule, “The lender who is the holder or servicer of the mortgage determines the creditworthiness of the assumptor, in accordance with standard mortgage credit analysis requirements. The Direct Endorsement (DE) lender may also use an approved authorized agent to process assumptions.”
Some loans have language in the original contracts that seem to restrict FHA loan assumptions. According to the FHA official site, some loans issued between 1986 and 1989 contained clauses or items that cannot be enforced, even when agreed to in writing by both parties.
In spite of their appearance in the contract, changes to federal law makes loan assumption restrictions non-binding. The FHA states, “Lenders should note that some mortgages executed from 1986 through 1989 contain language that is not enforced, due to later Congressional action. Mortgages from that period are now freely assumable, despite any restrictions stated in the mortgage.”
In our last blog post, we discussed FHA loans and credit history. Many people are afraid to apply for a home loan because of past credit mistakes, but it’s easy to assume the worst about credit reporting, your history with credit, and what an FHA approved lender is looking for when reviewing an FHA loan application. In some cases, those assumptions also apply to a lack of credit history.
An FHA lender must investigate the applicant’s credit reports. A few late credit card payments or other minor issues in the past aren’t enough to condemn the borrower or have an application rejected.
The FHA rules don’t have a chart for counting credit issues and a cut-off number for how many late payments are too many. Instead, the FHA rules state, “…minor derogatory information occurring two or more years in the past does not require explanation…”
That said, larger problems do require further attention. But even these aren’t enough to rule out an FHA insured home loan simply because they exist on your record. According to the FHA, “…major indications of derogatory credit-including judgments, collections, and any other recent credit problems-require sufficient written explanation from the borrower. The borrower’s explanation must make sense and be consistent with other credit information in the file.”
In the case of those who chose not to use credit much or at all, FHA rules still provide a way to be considered for a home loan. “For those borrowers, and for those who do not use traditional credit, the lender must develop a credit history from utility payment records, rental payments, automobile insurance payments, or other means of direct access from the credit provider. The lender must document that the providers of non-traditional credit do, in fact, exist and verify the credit information.”
Credit history in such cases may include public records or other “objective” sources. In all cases, “To verify the credit information, lenders must use a published address or telephone number for that creditor”
“As an alternative, the lender may elect to use a non-traditional mortgage credit report developed by a credit-reporting agency, provided that the credit reporting agency has verified the existence of the credit providers and the lender verifies that the non-traditional credit was extended to the applicant.”
A loan applicant with no late payments is considered an acceptable risk, generally speaking. An applicant with limited credit history who can show reliable payments is more likely to be approved for an FHA insured mortgage because the history that does exist shows reliability.
A home loan is a major investment. Many borrowers are nervous about the credit qualifying portion of an FHA home loan application because they’ve made mistakes in the past with credit, have collection judgements in their record or have experienced bankruptcy.
Those who have been through foreclosure sometimes assume they can never get their credit rating repaired enough to qualify for a home loan. But in many cases such fears are not warranted–at least where FHA loans are concerned. Conventional loans are more difficult to get in the wake of housing market woes, a bad economy and other factors, but borrowers trying for an FHA mortgage soon learn there are more options available than one might assume.
According to the FHA rules, getting access to those options means having a recent record of on-time payments, dependable income, and the likelihood of both income and dependability to continue. What does the FHA rulebook say about your credit history?
“Past credit performance” the FHA official site says, “serves as the most useful guide in determining a borrower’s attitude toward credit obligations and predicting a borrower’s future actions. A borrower who has made payments on previous and current obligations in a timely manner represents reduced risk.”
That’s great news for the slice of the American public that has had little trouble paying their bills. But what about those with less-than perfect records?
“…if the credit history, despite adequate income to support obligations, reflects continuous slow payments, judgments, and delinquent accounts, strong compensating factors will be necessary to approve the loan.”
Compensating factors include the length of time your credit record shows dependable payments since any financial trouble, and any explanations the FHA borrower can provide for the period where missed payments, bankruptcy or foreclosure happened. Situational difficulty is not viewed in the same manner as financial irresponsibility. FHA rules allow flexibility for those who had trouble, overcame that trouble, and got back on track.
FHA rules agree. “When delinquent accounts are revealed, the lender must document their analysis as to whether the late payments were based on a disregard for financial obligations, an inability to manage debt, or factors beyond the control of the borrower, including delayed mail delivery or disputes with creditors.”
If you’re considering an FHA insured mortgage, don’t hesitate to apply or prepare your finances to apply at a later date because of worries over your past credit history. Instead, contact a lender and your nearest FHA office and ask for assistance in planning for an upcoming loan application. You may be surprised to learn that a new home is closer than you think.
FHA loans require a property to meet certain requirements before a loan will be approved. FHA loan applicants looking at properties that can’t meet such minimum property requirements must look elsewhere, but when a property can be modified, repaired or improved to meet those standards, FHA rules allow that to happen.
Some properties have features that can’t be improved–some homes are situated in areas where well water is the only source available, and if the well doesn’t meet health and safety standards, the home may be considered inappropriate for an FHA mortgage.
One similar area concerns septic and sewage systems. What are the FHA requirements for septic/sewage?
FHA rules state that the lender is responsible for making sure a particular property lives up to local requirements and that community sewage systems are property licensed and “adequate to service the property.” The FHA does not maintain a specific list of “approved” septic systems.
Some properties may not be connected to a public sewer system. This does not automatically render the home ineligible to be purchased with a FHA-insured loan, but the rules are clear–the system must be approved locally. “For properties that cannot connect to a public system and are served by an individual sewage system that is acceptable to the local health authority, the system is then acceptable to HUD/FHA.”
The FHA says a variety of systems qualify under this rule–cesspools, mound systems, and “individual pit privies”. If any of these meets local code, there are no questions asked from the FHA end of the process.
There is one exception–any such sewage system that shows evidence of failure must be inspected by the local health authority or a licensed professional sanitarian. The system must pass inspection in order for the property to be approved for an FHA mortgage loan. In cases where the property has been unoccupied for a month or more, “the lender’s underwriter must decide if an inspection of the system is necessary.”
Sewer systems are not identical, but as long as the system is functioning properly and lives up to local codes, the FHA does not disqualify the home simply because a sewage or septic system isn’t the same as a typical suburban system in a metropolitan area.
An FHA Home Equity Conversion Mortgage or HECM loan lets qualified borrowers age 62 or older get a loan on their home which is not paid back in any way until the borrower dies or sells the property.
Borrowers can get a line of credit or cash payments (or combinations of the two) depending on how the loan is set up. There are specific rules and requirements for HECM loans, and borrowers must get mandatory HECM loan counseling through an FHA-approved agency before the loan will be approved.
The FHA is strict about the counseling requirements–an informed borrower is able to make the right choices for their circumstances. But HECM counseling is not free, and the counseling agencies are not government entities. Because the borrower is required to pay a fee for FHA HECM loan counseling, there are regulations governing how the fee can be paid and by whom.
HECM counseling fees can be paid by the client (and/or “related parties” according to the FHA official site) directly to the counseling agency. Any direct payment must be reflected in FHA loan paperwork including the HUD-1 Settlement Statement. Documentation of the payment is required as part of the FHA loan process.
The cost of HECM counseling may also be paid out of the HECM loan itself. That means that while counseling is required before the loan will be approved, payment for those services may be delayed until the loan has been issued. In such cases the FHA allows payment to come from someone other than the borrower. FHA rules state, “Upon agreement of both the lender and the borrower, the closing agent may assume responsibility for remitting payment to the counseling agency that performed the service.”
Again, the payment must be reflected in the HUD-1 Settlement Statement.
FHA rules do not allow the lender to pay. According to the rules, “Lenders may not pay HUD-approved counseling agencies, directly or indirectly, for HECM counseling services through either a lump-sum payment or on a case-by-case basis.” There is also a “transparency” requirement to show how the HECM counseling fee has been agreed to be remitted. “Form HUD-92902, Certificate of HECM Counseling, provides a space to record how the counseling session will be paid, – either ‘Upfront Fee for Counseling Session’ or “Financed Fee for Counseling Session” and a box to check if the fee has been waived.”
In all cases–even where the counseling fee has been waived, documentation of counseling and the fee agreement is mandatory.
When applying for an FHA home loan, a borrower does not have to share the financial responsibility for the mortgage all by themselves. FHA rules allow a co-borrower or co-signer to apply alongside the borrower.
In some cases this can improve the FHA loan applicant’s chances of getting a loan approved, and it’s also a way for a borrower with established credit to help a co-borrower become a home owner under the proper circumstances.
It’s easy to assume a co-signer and co-borrower are the same thing, but in the eyes of the FHA and the lender, these are two separate terms. Co-signers don’t have the same benefits as co-borrowers, though they may share the same responsibilities in many cases.
According to the FHA, “Co- borrowers take title to the property and are obligated on the mortgage note and must also sign the security instrument. The co-borrower’s income, assets, liabilities, and credit history are considered in determining creditworthiness.”
Compare that to the FHA requirements for a co-signer, who does not have interest in the property purchased with an FHA insured mortgage, but do carry responsibility.
The FHA states, “Co-signers do not hold ownership interest in a property, but are liable for repaying the obligation and must sign all documents with the exception of the security instruments. The co-signers income, assets, liabilities, and credit history are considered in determining creditworthiness for the mortgage and the co-signer must complete and sign the loan application.”
A co-borrower or co-signer cannot have financial interest in the property. That means that a buyer cannot co-borrow with the seller of the property. The same applies to the builder, real estate agent or other “interested parties” that could profit from the sale of the home.
The FHA does provide an exception to this rule. “Exceptions may be granted if the seller and co-borrower/co-signer is related to the owner by blood, marriage or law.”
Borrowers interested in purchasing older properties using an FHA insured mortgage could face several challenges depending on the nature of the property. For example, some buildings insulated or otherwise constructed with asbestos products could pose a health hazard. FHA rules include minimum property requirements for safety, which address situations like these. Is a property eligible for an FHA loan if it has asbestos in it?
There’s no single answer to this question–there were many products which contained asbestos before the government banned its use in 1989 under an EPA rule. In the late 90s, a Circuit Court of Appeals partially modified this ban, which is why asbestos may still be found in some floor tile and other items.
According to FHA requirements, “A property with asbestos may be eligible, depending on the location and condition of the asbestos.” The FHA gives some examples of this, stating that roof shingles which contain asbestos, “does not pose a danger as would be if the material were deteriorating within the confines of a home. When used as a wrap for hot water pipes, it is usually covered and poses no danger.”
The FHA rules clarify what should be considered a danger by an FHA appraiser. Any asbestos-containing material that is deteriorating and has the potential to be inhaled is considered a health and safety risk.
“If an appraiser notices this,” FHA requirements state, “he/she should make a note on the appraisal report that there appears to be asbestos insulation wrap around the hot water pipes. If there is not obvious deterioration of the asbestos such as punctures or other damage, it should be left alone. If there is obvious damage, the appraiser should annotate the appraisal and the lender should require an inspection by a professional in that field to determine the proper course of action that is the most cost effective method of abatement.”
Asbestos, like many other issues, would be examined on a case-by-case basis. The existence of building materials or insulation made from asbestos is addressed according to that specific instance.
An appraiser’s recommendations would have to be followed prior to the loan being approved. Those recommendations may include removal or other measures, it all depends on the nature of the material and whether it poses a threat to health. FHA rules require a property to be safe and habitable, the presence of asbestos is evaluated accordingly.